Can blockchain help the legalized marijuana industry?

When people think of blockchain, cryptocurrencies remain the top association for the wider public. Its other uses, like mango tracking, or following 17,000 kilos of almonds from one country to another, may not be enough to completely convince people it’s a useful technology. But it does show what can be done, and has some very practical applications for the distribution and tracking of product.

Come October 17 when recreational marijuana for adults is legalized nationwide there could be another use case to show the value of blockchain. The marijuana market is new and largely untapped by traditional banks and regulatory bodies. There are still many unknowns, but advocates of blockchain technology are asking governments, investors and the world to pay attention to its potential role in marijuana monitoring.

Back in 2017, the B.C. government put out an open call, asking the public how the province should manage the emerging marijuana market. IBM responded and advised the government to look into the benefits of using blockchain technology.

“IBM suggests Blockchain is an ideal mechanism in which B.C. can transparently capture the history of cannabis through the entire supply chain, ultimately ensuring consumer safety while exerting regulatory control from seed to sale,” read IBM’s four-page proposal, which has since been removed from the government’s website. Yahoo Canada Finance reached out to a representative from Service BC for comment about this removal and received an email directing attention to this regulation document, but not the original link.

As the legalization date presses closer though, more discussion on blockchain technology and its potential use has taken place.

“Bitcoin proved it can be done but not how to do it,” mathematician Charles Hoskinson, founder and CEO of blockchain research and development company IOHK, told Yahoo Canada Finance during the Blockchain Futurist Conference in Toronto.

“The really good thing about the marijuana industry is they’re developed world, unbanked people. So if you’re saying ‘how do I help people in Ethiopia or Rwanda who are unbanked’ you’re not going to solve it in the first try, but you could bank the unbanked here in North America, and the marijuana industry is a perfect example of that,” says Hoskinson. “Banks won’t deal with marijuana dispensaries, they live in a mostly cash economy. [For the most part] it’s illegal to have accounts.”

Just last week, Florida agriculture commissioner candidate Nikki Fried had her Wells Fargo bank account closed because she supported marijuana.

“Marijuana is a bit of a social faux paux, it’s becoming less so, but interestingly enough blockchain also has this faux pas,” says Sascha Mojtahedi, CEO and founder of Bunz. Bunz recently stepped into the cryptocurrency market with its BTZ token, which is currently accepted at over 250 locations in Canada including cities such as Ottawa, Vancouver, Hamilton and Montreal, and is accepted at 100 locations specifically in Toronto.

Prior to his role at Bunz, Mojtahedi did system design for banks including designing the AML/ATF system for TD Bank as well as redesigning TD’s stock research platform and future state RESL platform. He sees great potential for the marijuana market and blockchain technology to piggyback one another. One way to achieve this is through a zero knowledge proof identity token.

“What this [identity token] means is that after I’ve got, say, my driver’s license or some form of identity uploaded onto a blockchain, it’s unique, not fungible, and if I wanted to go to a dispensary it wouldn’t need to know my name or anything outside of one criteria which is receiving a ‘yes’ or ‘no’ back indicating whether or not I’m allowed to buy legal marijuana,” explains Mojtahedi.

“What if I didn’t need a photo ID and instead directed to an address or token when entering a dispensary? I keep my information private and the door unlocks,” he adds. “You don’t get my face or my thumbprint, but a ‘yes’ comes through. This is a potential use in the marijuana market.”

Mojtahedi, however, is transparent about not knowing what the marijuana protocols are and that the market is unmapped, at least publicly. But if protecting one’s identity is a concern, he says, then a zero knowledge proof identity token could be an option to implement.

As a proponent of crypto tokens, Mojtahedi adds that tokens can act as an alternative to cash in marijuana transactions. If someone were to buy tokens and then use those tokens to buy marijuana, it could be an alternate way of payment and potentially alleviate fear that a “dispensary gets robbed because they keep $50,000 in cash” instead regarding the “blockchain structure and the token themselves as bank,” says Mojtahedi.

Growing industries getting together

The marijuana space is seeing more partnerships being formed too — from Constellation Brand’s $5 billion investment in Canopy Growth, to the announcement that 26 licensed producers have signed agreements with the Ontario government. The business world is also beginning to see partnerships between fintech and cannabis companies. Polymath, touted as the “industry’s first security token launchpad” and 7Pass, a cannabis investment company, recently announced the first private security token for the cannabis market.

Cryptocurrency companies like California-based Paragon already tried tapping into the use of blockchain technology within the marijuana space, but this resulted in a lawsuit since the company did not register its initial coin offering in accordance with California law and regulations. The company has since pivoted to the healthcare industry, acquiring shares in new operations like CareX (“CARE Tokens”).

Are we banking on too many unknowns?

Not everyone buys what blockchain proponents are selling, though.

“Blockchain systems are often thought of as having more integrity than non-blockchain systems, but the hardest part about creating an accurate record of what happened is typically about getting people to enter truthful data, not about protecting data from tampering once it’s in the system,” said Kai Stinchcombe to Yahoo Canada Finance via email. Stinchcombe is the CEO of True Link, a San Francisco-based banking and investment service for seniors, people with disabilities and those recovering from addiction.

“Blockchain based payments makes it harder to tamper with past records once they are in the system, but typically makes it easier rather than harder to enter false transactions in the first place,” explains Stinchcombe. “Think about a mysterious credit card charge showing up in your online banking. Do you think ‘someone stole my credit card number’ or do you think ‘someone at the bank entered a record of a transaction that never happened?'”

Stinchcombe, who dubs himself “Whatever the opposite of a futurist is” on his Medium page, has been a vocal opponent to the use of blockchain technology.

“When a politician is caught having tweeted something racist they say ‘someone stole my password’ not ‘Twitter made that up, I never typed it’,” he adds. “Or suppose you’re using blockchain for organic certification–what about the fact that the record is kept on the blockchain and makes it harder for the person out in the field to spray pesticides on his [or her] mangoes?”

“I don’t think there’s any difficult problem in legal cannabis sales that blockchain can help with, unfortunately,” said Stinchcombe.

But mathematician Hoskinson remains keen that using blockchain technology could help “model out from seed to joint” in the marijuana space and that from a taxation standpoint, “[blockchain] could verify that everybody paid their taxes along the way.” He says people wouldn’t need banks because “you have an asset that requires no counter party, no custodian…it requires you to use corresponding relationships.”

“If you have a cash-like structure but you have the ability to do what banks do and teleport value anywhere in the world, the one problem is value stability,” explains Hoskinson. “You can’t go into a marijuana dispensary and be a Bitcoin speculator because the value goes way up or goes way down. [Dispensaries] are a business and at the end of a day they have margins, employees, bills. Their job is not about being a currency trader, their job is being a merchant so you need value stability for this to work, as we develop stable coins we’ll be able to integrate that into the system.”

In Ontario, recreational cannabis sales will be available only through the Ontario Cannabis Store starting in October. Sales through private dispensaries will come into effect in 2019.

Download the Yahoo Finance app, available for Apple and Android.